THE CHALLENGE: You're struggling to make payments
Step two: Think carefully before informing your bank that you're struggling, advises South Florida consumer attorney Margery Golant. "The things [ banks] tell people are wrong or misleading," she says. Many banks, for instance, have told homeowners they must be in default to get help, even though that's not true. Instead of calling your bank, contact a government-approved, nonprofit housing counselor at MakingHomeAffordable.gov or by calling 888-995-HOPE; using this service is free.
Deals to modify loan terms get a lot of attention, but a counselor is likely to start with something much less flashy: your budget. Absolutely everything in your budget is negotiable, Druliner says. You might cut back on food, cable, or entertainment. Or you might increase your income by taking in a roommate or getting a part-time job. Jennifer Wallis, vice president of Consumer Credit Counseling Service of Central Oklahoma, recalls one family who kept their home by moving out. Rental houses were in demand in their neighborhood, so they became landlords and found a cheaper place to rent for two years.
If your credit is still good — generally a FICO credit score of 740 or above — you may get relief by simply refinancing and stretching payments out for 30 more years. Over the long run you could owe a lot more interest — and you would need to buy private mortgage insurance (PMI) if you have less than 20 percent equity in your home — but you'll address immediate cash flow problems. The Home Affordable Refinance Program (HARP) — one component of the government's mortgage-rescue program — will let you refinance with negative equity. (If you have PMI now, you'd still need PMI with your HARP loan.) To qualify for HARP, however, you must not be in default.
If your credit rating is below 700 or you've missed a payment, your options are more limited. You can pursue a loan modification — when the lender changes the terms of your existing loan so it's easier for you to pay — but there's a lot of paperwork involved and no guarantee a lender will provide a modification. "Be persistent," says Odette Williamson, a staff attorney with the National Consumer Law Center. Keep a record of everyone you talk with and every document you send. The Home Affordable Modification Program (HAMP) — another component of the government's mortgage-rescue plan — can reduce your payments to 31 percent of your monthly pretax income. Most home-loan-modification programs offer a trial period: several months in which you make reduced payments. Generally, if you don't miss a payment during this time, you will receive a permanent loan modification.
Even among those whose loans are modified, though, about half fall back into delinquency, studies have shown. (Those with HAMP modifications fare a little better.) That's usually because underlying budget problems remain, says Wallis. "A mortgage delinquency is the symptom of a problem. It's not typically the problem."